Collect Income From A Quality BDC With A Yield Over 12%
"When Choosing High Yielding Stocks, Never Sacrifice Quality For Quantity"
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Current Price: $15.12
Current Yield: 12.48%
Portfolio Purpose: Income 💰
Recently, Hercules Capital (HTGC) has seen its share price plummet. At the time of writing, the BDC is down more than 28% over the past year. For a company that typically trades at one of the highest premiums in the sector, that kind of decline is notable.
Lower interest rates have weighed on the broader BDC space. But what really sparked the sell-off was HTGC’s 35% exposure to software companies — a sector facing valuation compression amid AI disruption.
While volatility may persist, I believe the market reaction has created a compelling opportunity. After reviewing the latest earnings, fundamentals, and valuation, I am upgrading HTGC from Hold to Buy.
Previous Hold Thesis 🛑
I last covered Hercules Capital in June 2025 on Seeking Alpha with a cautious stance.
At the time:
Interest rates were expected to decline.
Lower base rates posed downside risk to net investment income.
Q1’25 earnings missed on both the top and bottom lines.
NAV declined slightly from $11.63 to $11.55 quarter-over-quarter.
Shares traded at a rich 1.57x P/NAV.
Dividend coverage remained solid at 113%, but the premium valuation and macro uncertainty kept me on the sidelines.
Since then, HTGC has fallen over 14%, while the S&P 500 (SP500) has gained more than 11%.
The valuation gap has narrowed meaningfully.
Latest Earnings: Quality on Display 💵
Hercules Capital reported Q4 results that reinforce why it’s widely considered one of the highest-quality BDCs in the sector — alongside Capital Southwest (CSWC) and Ares Capital (ARCC).
Even after the sell-off, HTGC trades at a 1.25x P/NAV, which remains a premium — but much more reasonable than prior levels.
For comparison:
ARCC trades at ~0.97x P/NAV
CSWC trades at ~1.36x P/NAV
Record Investment Activity 🎖️
Despite compressed spreads and macro headwinds:
$1.06 billion in gross & equity commitments (up 71% YoY)
$4 billion in originations for 2025 (record year)
Portfolio grew from $3.83B to $4.6B
Added 39 new borrowers
Lower base rates may pressure yields, but they also increase transaction activity — and we are seeing that play out across private credit.
Income & Portfolio Strength
Net investment income: $0.47 per share
Total NII: $341.7M (record)
Total investment income: $532.5M (record)
NAV grew 4% year-over-year to $12.13 and increased sequentially from $12.05.
Low non-accruals reinforce portfolio health:
0.2% at cost
0.1% at fair value
For context, ARCC’s non-accruals sit materially higher.
NAV growth and credit quality are two metrics I monitor closely when evaluating BDC durability — and HTGC continues to deliver.
Dividend Strength: 120% Coverage + Supplemental 💪🏾
HTGC declared:
$0.40 base dividend
$0.28 supplemental dividend (spread over 2026)
Base dividend coverage sits around 120%.
Spillover income totals approximately $0.82 per share (~$150M) — providing a cushion against lower base rates.
Hercules has paid supplementals for six consecutive years. That consistency speaks volumes.
With a current yield around 12%, HTGC offers one of the most attractive income profiles in the space.
Balance Sheet & Liquidity ⚖️
HTGC’s balance sheet remains strong:
Raised $300M in additional capital via bond offering
Total liquidity now approximately $1B
Conservative underwriting discipline emphasized by management
Strong liquidity gives HTGC flexibility to capitalize on increased deal flow.
Addressing the AI Risk 💻
The market’s concern centers on HTGC’s 35% exposure to software and the disruptive impact of AI.
Here’s how I view it:
Management has emphasized conservative underwriting.
Many portfolio companies are integrating AI into core offerings.
Non-accruals remain extremely low.
PIK income accounts for just 9% of revenue — not elevated.
Could volatility persist? Yes.
But the narrative of structural deterioration appears overblown.
AI will create winners and losers. HTGC’s disciplined underwriting increases the odds they finance the winners.
Risk Factors ⚠️
Continued rate cuts could pressure net investment income.
AI disruption could lead to rising non-accruals.
A spike in PIK income would be an early warning sign.
These are risks worth monitoring — but current data does not signal distress.
Bottom Line ✅
Hercules Capital delivered:
Record NII
Record investment income
Record originations
Growing NAV
Strong dividend coverage
Robust liquidity
The stock has fallen, but fundamentals remain intact.
Lower base rates should drive higher deal activity, offsetting some yield compression. AI concerns appear manageable, not existential.
At today’s valuation and a 12% yield, the risk/reward has shifted meaningfully.
I am upgrading Hercules Capital from Hold to Buy.
If you’re building income the disciplined way — collecting dividends while managing risk — this looks like one of the more attractive entry points we’ve seen in some time.
Are you buying the dip, holding steady, or waiting for further clarity? Let me know in the comments.
Happy Investing!
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Not financial advice. For educational purposes only. I am not a licensed professional. Do your own due diligence.
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